#1 ABC

Activity
Costs of Each Type
of Activities
Amount of Each
Type of Activities
Cost Per Service
Storage 1550000 350000 4.43 $ per carton of inventory
Requisition Handling 1801000 310000 5.81 $ per requisition
Basic Warehouse Stock Slection 761000 775000 0.98 $ per line
"Pick-Pack" Activity 734000 697500 1.05 $ per pick pack
Data Entry 612000 775000 0.79 $ per line entry
Desk top delivery 250000 8500 29.41 $ per delivery
#2
Service Cost Storage
Requisition
Handling Basic Warehouse Stock Slection
"Pick-Pack"
Activity Data Entry
Desk Top
Delivery Total Cost
Customer A 1,550.00 $ 2,114.72 $ 893.56 $ 957.62 $ 718.61 $ - $ 6,234.51 $
Customer B 3,100.00 $ 4,589.65 $ 2,454.84 $ 2,630.82 $ 1,974.19 $ 764.71 $ 15,514.21 $
3 Current Method Customer A Customer B ABC based service costs Customer A Customer B
Annual Sales 79,320 $ 79,320 $ Annual Sales 79320 79320
Cost of Product 50,000 $ 50,000 $ Cost of Product 50000 50000
Service Fee Charges(32.2%) 16,100 $ 16,100 $ ABC service charges 6,234.51 $ 15,514.21 $
Profit before taxes 13,220 $ 13,220 $ Freight 2250 7500
Taxes 4,627 $ 4,627 $ Cost of Capital 1950 6500
Gross Profit 8,593 $ 8,593 $ Total Expenses 60434.51039 79514.20767
Profit before taxes 18,885.49 $ (194.21) $
Taxes 6,609.92 $ - $
Gross Profit 12,275.57 $ (194.21) $
3
Under the current pricing system, Customer A is far more profitable. This is due to the fact that Customer A
requires far fewer services than Customer B does. It is apparent from our analysis that these services are the
root cause of the difference. If this problem were to be rectified in some manner, such as the ABC based
costing that was used for analysis, it would make it much easier for Allied Office Products to manage its
business. These services include, inventory/warehousing, pick-pack activity, desk top delivery, data entry,
4
60 million
3 years in, still growing
Our managerial advice concerning the TFC business is to drop the desk top delivery. However, management
should be open to individual desk top delivery cases for increased fees.
costing that was used for analysis, it would make it much easier for Allied Office Products to manage its
business. These services include, inventory/warehousing, pick-pack activity, desk top delivery, data entry,
and requisition handling.

Also, this analysis indicates that Allied Office Products has been valuing their customers in an improper
manner. Allied needs to take these service charges into account when valuing their customers because it
could mean the difference between turning huge profits and going bankrupt. Exhibits 4 and 5 show the 20
most and 20 least profitable clients under the current pricing system. These exhibits would change
drastically if they clients were charged for their services.
We do recommend implementing the new Service Based Pricing (SBP). We also believe Allied should
iplement additional chargest for desktop delivery and monthly charges for inventory over 9 months old
(1.5% per month). The SBP system will allow Allied to charge their clients for what they actually use,
resulting in much more reliable cost figures for each client. The 1.5% per month will add up quickly for
some clients, which will force them to either continue to pay the prices (free money for Allied) or use up
the inventory first (reducing the cost of warehousing for Allied). The desk top delivery is stated as being a
huge pain and charging for these run will not only reduce internal complaints, but will help bring in
revenue as well.

Also, the SBP system will allow Allied to value their customers more appropriately. As mentioned
previously, Allied will not be able to find out a more realistic cost of supplying the clients with the
merchandise and will be better able to determine which clients are making Allied money and which ones
are hindering the company's growth.

Furthermore, unhappy customers (due to the fact that some will be charged more) should not be a
problem. The customers who are unhappy about the added costs are those that are using all of the fees
for free right now and they are running up the expenses for Allied. If these clients are not turning a profit
for Allied, it would be best to drop their accounts.
Our managerial advice concerning the TFC business is to drop the desk top delivery. However,
management should be open to individual desk top delivery cases for increased fees. If Target Corp. were
to buy a million dollars in merchandise and wanted it delivered Allied should do so to not only make
Target happy, but to raise additional revenue by charging a high fee (TBD on a case by case basis) for the
delivery.

TFC needs to stay the way it is, sans the desk top delivery. The TFC is a small revenue generator ($60
million in a $900 million company) for Allied, but it has only been around for a little more than 2 years.
Going from nothing to $60 million in revenue for any company in a matter of 2 years is pretty impressive,
especially in a market that already existed. Additionally, the company is continuing to grow and should
show even larger revenue streams in the future, especially once the SBP system is implemented.

Finally, TFC is helping to distinguish Allied from its competitors. This is a nearly invaluable characteristic of
TFC idea. In an industry where competitors are practically clones of one another is it very helpful to be
able to show how your organization is different, and in this case better, than the other companies in the
industry. Allied is the only company who has a system like this and it is helping the clients greatly by
allowing the clients to focus on what they do best and not having to worry about storing the inventory or
having too much or anything like that. TFC must stay.